Share
Once you have prepared your financial statements at the end of the monthly closing cycle, chart accounts receivable to accounts payable, as a ratio. Include any unbilled but earned sales for inclusion into AR and any accrued AP invoices not in the official AP Aging. If you use your company’s line of credit, include that balance as well with the AP.
What this ratio does not take into account is payroll which is paid out each week and never appears on the AP. At month end, when you calculate AP, you might add in the accrued payroll (earned but not paid until the following month).
However you decide to calculate this ratio; do it consistently once you decide, try not to change. The important thing to track and watch is the trend that emerges over time. If you are making money, the profit will pay down the line of credit upon receipt. If you are losing money, accounts receivable will start to shrink compared to accounts payable. Yes, there are reasons for where this money might be going (i.e. Purchase of more equipment, increase in inventory, new product trials and company expansion).
One thing you should consider in the event there is a large swing in this ratio is the amount of cash on hand. You can have large AP relative to AR but the cash is large also due to not paying AP down.
